Sharechat Logo

Concerns Reserve Bank too relaxed on inflation

Thursday 10th March 2011

Text too small?

Economists are concerned the Reserve Bank is paying too little attention to inflation risks after it cut the official cash rate half a percentage point in response to last month's devastating Christchurch earthquake.

Today's move returns the OCR to the record low level in place between April 2009 and June 2010, put in place to combat the recession of 2008-09.

In its quarterly monetary policy statement (MPS), the Reserve Bank said the earthquake would clearly have a negative impact on activity in the near term.

"It is difficult to know how large or long lasting this impact will be, but there is a risk that the downturn is quite severe. To guard against this risk it is appropriate for monetary policy to become more supportive," the MPS said.

"Lowering the OCR should be regarded as an insurance measure, designed to help offset the negative effects of the earthquake until such time as rebuilding -- and a recovery in the broader economy -- act to draw on the economy's surplus resources."

A preference by borrowers for floating rate mortgages meant any move in the OCR translated relatively quickly to the interest rates actually faced by households and firms, the MPS said.

"The (Reserve) Bank can ease policy knowing that the resultant reduction in effective interest rates can be reversed quite quickly once the economy begins to recover."

ANZ chief economist Cameron Bagrie and head of market economics and strategy Khoon Goh said their view was that inflation would prove less benign than the Reserve Bank had projected.

There were clear upside risks to the Reserve Bank's inflation forecasts in the near term, stemming from higher energy prices, they said.

The Reserve Bank's medium term inflation forecasts, which settled around 2.2 percent, looked far too light given the known looming upside pressures to prices.

The economy also had the potential to turn more sharply in the latter part of 2011 than the Reserve Bank was expecting, the ANZ economists said.

"Indeed, a combination of the Rugby World Cup activity, the ramping up in reconstruction work and the diffusion of a massive terms of trade boost looks set to boost economic activity late in the year."

BNZ head of research Stephen Toplis said he was "a bit concerned" that the Reserve Bank spent little time discussing the inflationary impact of the earthquake.

"Fundamentally, we believe that the earthquake has significantly raised the inflationary pressure on the economy as it is as much a supply shock as a demand shock," Mr Toplis said.

While the Reserve Bank had chosen not to publish many of the forecasts it usually did in an MPS, it could be concluded it was forecasting around no growth in the December quarter of 2010 and a small negative for the March quarter of 2011. Some momentum turned up in the 2011 June quarter and then very strong growth was forecast in each of the next five quarters.

The Reserve Bank said it had reduced the economic projections in today's MPS because following the earthquake it had needed to make many important assumptions based on quite limited information.

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

NZ imports rise in 'preferred' areas
Manufacturing volumes rise for second consecutive quarter
A little more optimism about economic growth
NZ economy on two-speeds because of earthquake
Christchurch earthquakes shake GDP down
NZ home building consents slip
Inflation expectations edge lower
Economic recovery may have slowed